This is the perfect time to discuss the effects of zero interest rates as it has been 20 years since the Bank of Japan embarked upon the path of crushing interest rates in an effort to jump-start inflation in Japan. This is very important as we enter into the discussions about the potential for negative interest rates in the U.S. while also entertaining the idea that the U.S.’s growing debt pile and deficit have no consequence as long as the government borrows in its own currency and optimizes its printing press.
This is the premise of Modern Monetary Theory (MMT) that some of the newly elected members of Congress are promoting. It is predicated on the theory advanced by Warren Mosler that the modern state can spend unlimited amounts of money as long as it borrows in its own currency and has the ability to tax and print. Mosler himself offers up that there is “one valid criticism of MMT. And it comes down to this … you either believe in an informed electorate or you don’t.”
The issue of an informed electorate is not defined but if Mosler means a population that votes for even more entitlements, the answer is simple. The failure to define informed is a major problem. The issue becomes even worse when the speaker’s corner for policy makers, Foreign Affairs, publishes an article by two former Obama policy makers, Jason Furman and Lawrence Summers titled, “Who’s Afraid of Budget Deficits?” Summers is not promoting MMT but does encourage massive government borrowing because of the ultra-low real yields, especially on a historical basis, is a very doable proposition. Summers even explains that advocates of MMT goes too far and says this:
“Taxes should be set based not on spending levels but on macroeconomic conditions, and deficit financing has no effect on interest rates. Some politicians have invoked those positions to suggest that the government not worry about debt at all. [Kelton and other MMT supporters claim that this is a misrepresentation of their theory, but it is not clear what their true arguments are, and most of the political supporters of MMT have used it as a justification for ignoring government debt entirely.”
The increasing discussion about any negative impact from the growing deficits of developed governments should set off alarms for all investors. The history of modern history is replete with sovereign governments debauching its currency in an effort to “euthanize the rentiers.” As many economists have noted, Keynes favored a slow, gradual repression of the coupon clippers by pushing copious amount of money into the financial system to keep rates from rising.
It was suggested that Keynes had learned from Vladimir Lenin that to debauch a currency was when unlimited amounts were circulated inflating away any concept of its underlying value. Euthanizing the rentiers was not debauchery. But if the MMT crowd gains control of the levers of finance, WHY WOULD I WANT TO OWN U.S. DEBT?
- Japan had actual deflation so even though Japanese bondholders received next to nothing in nominal rates, deflation provided returns to coupon clippers with more than 1 percent real rates of return because of lower consumer prices. In the U.S., interest rate receivers have seen negative real rates when the FED was at the zero level. Also, from a currency perspective, Japanese investors owned 97 percent of the JGBs when the BOJ began its stimulus, inflicting almost no pain on foreign creditors;
- When the BOJ and the Japanese government began ZIRP, Japan had a massive pool of private savings to cushion the blow, which was/is certainly untrue in regards to the U.S. The Japanese have run up massive fiscal deficits in an effort to ignite inflation and lessen the debt load for nothing relieves the burden of debt more than inflation, but the debt is owed by the Japanese to the Japanese. This is not at all true for the U.S. as it owes massive amounts of money to foreign holders of U.S. bonds. More importantly, the Japanese yen is of limited use as a global reserve currency thus limiting the massive dislocations from its potential debasement through the PRINTING PRESS. The bottom line is that the MMT/GROW THE DEBT leads me to be very concerned about owning any type of longer-term U.S. debt.
Tags: BOJ, gold/yen, Japanese yen, Jason Furman, JGBs, Larry Summers, MMT, modern monetary theory, ZIRP
February 12, 2019 at 8:33 pm |
US thinks that the world is a Dollar’s hostage. Which made US govt debt financing into a non-issue. When do you think will the world cut its chains of dollar oppression and how do you think it is going to happen?
February 13, 2019 at 7:21 am |
This new book linked below explains how. It’s NOT bitcoin as you might think at first glance. Written by self-taught finance and network architect tech guru Eric Townsend, who also founded and hosts the wonderful, free MacroVoices site, and is now a permanent resident of tax haven Hong Kong, which currently sports more billionaires per capita than any city (read: Townsend is very successful and knows what he’s talking about in this matter).
https://www.amazon.com/Beyond-Blockchain-Dollar-Digital-Currency-ebook/dp/B07JXSRG5J
The overview provided is worth a read but omits anything about the topic of gold, described in the book as the key asset, of which China & Russia now have more than everyone else, that will be used to legitimize and back their forthcoming offshore international digital currency in an effort to displace the debt-backed dollar hegemony. Using an efficient, transparent, decentralized blockchain technology instead of the inefficient, centralized (and now weaponized) SWIFT. To wit, even the EU is interested due to its opposition against the new US sanctions on Iran crippling EU business & companies there.
But it will boil down to the credibility and faith in gold & blockchain versus debt & swift/banks.
February 13, 2019 at 7:52 am
^ Sorry, the amazon link rendered on Underground as a big obnoxious image instead of a URL text 🙁 … Well, click on BUY to see the Amazon page/overview for the book, or click preview to see its opening pages.
February 12, 2019 at 8:46 pm |
Yra
While you may be quite right that you will not allow yourself to be debauched owning long term US debt, I think you need to extend your fear to all US-denominated assets. What good is it for a foreigner to earn 15% in the S&P in a year when the USD might be down 10% under the glorious implementation of MMT?
But, first, it is time to party on, Wayne. Stocks to,the moon, especially if Trump and Xi kiss and make up soon.
February 12, 2019 at 10:37 pm |
Mike—that is a very sound response and as traders that is definitely the course to take.Today the SPOOS settled right up at the 200 day m.a. –the game is on with the binary focus of Chinese trade issues and the on again/off again game of closing the US government down.The issues I raise here are much more significant as the year roles on but as a trader i play the cards being dealt —as an investor I am lightening my load into the classic mean reversion taking place in the equity markets.But if you are bullish stocks and you are not buying the beaten down stock with low p/es and low debt to equity ratios with decent cash earnings then you should fire your broker.I would not be chasing momentum but there are certainly many stocks that fit my criterion.
February 13, 2019 at 2:59 am
Yra, if there’s a parallel between now and the start of the 2000’s, then indeed we shouldn’t chase US momo stocks but we can feel better about long ignored US value stocks. As recall the crash back in that era was focused on high flying tech stocks while low-pe, old economy US stocks stood relatively tall in contrast to having been the do-nothing dogs of the 90’s. The bigger equity rotation eventually was from US international (which tends to swing back & forth like a pendulum over the years), while USD peaked and began a long major decline for years. Then as now, foreigners appear to have had a waning appetite for US equities, while I think Treasuries have caught a bid thanks to higher US yields, at least compared to Europe, which has helped keep the dollar afloat, so far, at least against Euro.
February 13, 2019 at 3:32 am |
Lots of issues in today’s blog.
MMT and who cares about debt with a printing press and low interest rates. That may work but you need two things to happen. One, continued faith in the fiat currency by the buyers of that debt, and two, interest rates remaining low. With US national debt doubling every ten years or less, who will the buyers be? Foreign holders of US debt have been sellers. Domestic buyers have taken up the slack. With ever plentiful supply, how long will that continue? And if prices begin to rise, a not unlikely scenario with the printing press, how long can you keep buyers happy with low rates and negative real returns? Favoring debtors over savers has a peak point that invariably reverses.
What is rarely taught is that Keynes advocated REDUCING government debt in times of a strong economy.
Bretton Woods gave the dollar great status but responsibility as well. A favorite chart of mine here below: Post Nixon Shock 1971, the US abandoned its responsibility as a reserve currency.
https://www.google.com/search?q=chart-Image+result+for+graph-+debt+rise+after+1971+gold+convertibility+ended&tbm=isch&source=iu&ictx=1&fir=n5yeGEwC7dOhVM%253A%252Cc8qNO52QO5dZ9M%252C_&usg=AI4_-kRQIZ7zi7ykDU7JhH89hvvOcWafEQ&sa=X&ved=2ahUKEwiDisvQrrjgAhWitlkKHZM2Aq4Q9QEwCXoECAEQBA#imgrc=n5yeGEwC7dOhVM:&spf=1550049042840
Finally, re stock market irrational exuberance again. Valuations of stocks is importantly based on discounted future cash flow. China, Europe (especially Germany) economies slowing down, many sovereigns and banks depending on QE, etc. for solvency, should I be buying debt or equity in those entities? Stock prices do have a relationship to fundamentals, beyond Chinese trade agreements and Powell interest rate reversals. The algos will need some revisions at some point. Remember Long Term Capital Management 1998?
February 13, 2019 at 4:11 am |
Asherz, I think sentiment is also key to valuations. Or to be more precise, the direction and/or exhaustion of sentiment. That’s why some disciplines of TA strive hard to measure those. At the end of the day, gov’t manipulation via interest rates, QE, QT, MMT, fiscal incentives, etc work by positively impacting sentiment (or fail by not impacting on exhausted sentiment). Easier to say than apply, though. Cheers.
February 13, 2019 at 4:31 am |
David, No question about sentiment.. But I always talk as a long term investor, not as a short term trader. As we recently saw, Far from Neutral on October 3, and volte face in December. Sentiment can turn on a dime. As long term trader Art Cashin is wont to say, stay alert and very, very nimble.
I never learned to be nimble and leave that to the experts on this blog..
February 13, 2019 at 9:20 am |
Article states France well positioned after Draghi….
https://www.cnbc.com/2019/02/13/france-is-well-placed-to-take-the-ecb-top-job-after-draghi.html
February 13, 2019 at 11:12 am |
Yra,
Good to have you back in circulation, and thank you again for stimulative discussion points. Notes readers may enjoy https://blog.skepticallibertarian.com/2013/04/15/fake-quote-files-v-i-lenin-on-inflation-and-taxation/
Something for everyone be it Lenin, Keynes, or debauchers yet to be named!
February 13, 2019 at 6:30 pm |
Professor–thank you.I am or try to be meticulous in my citings which I qualified with suggested.But your addition to the discussion is certainly welcomed for as usual you add much to the discourse
February 14, 2019 at 7:39 pm |
Given the ability to tax and print optimally, what besides cosmetics, is the point of borrowing? 😉
February 14, 2019 at 8:46 pm |
Chicken —good question .Now that the Swiss National Bank has elevated the printing press to the philosophers stone—well pennies from heaven.The existence of a perpetual money machine can be found in the hands of the responsible and knowledgeable electorate—now we can sit on the beach,roll a spliff and enjoy Marley—no problem ,mon.The ultimate redemption song
February 15, 2019 at 3:11 am |
Because the big banks are in the business of parking funds at the Fed and in treasury debt, not in the business of lending to the real economy anymore. Why? Because there is no real economy anymore.